Market Update - November 2022

By: Tyler McLay MREI, BBA

Market Update - November 2022

Tags: Real Estate News, Market Update, Real Estate

Buying real estate in any market is accompanied by a degree of uncertainty and nerve; yet 2022 is, and has been, shadowed by more dynamic volatility than ever in recent history, especially in Toronto and the GTA. The shockwaves resulting from this force majeure event we all managed over the past 2 years are still being felt in markets across the globe. March 2020; the first lock down… the uncertainty mounted and the conversation surrounding economic downturn swilled among the masses. With government handouts, slashing of interest rates and inflation soaring - there was a lot to discuss from a real estate perspective. We know, that when money is cheap and access to capital made easy (via low interest rates) purchasing power is amplified as a result. With not much else to distract ourselves, we turned a heavy focus to real estate.
Pre-pandemic real estate markets were rock solid, the underlying fundamentals were clear. A positive outlook based on the prospect of growth driven by: intense immigration targets, densification in city centres, the creation and desire to add quality jobs filled by graduates at top-tier post secondary institutions, scarcity in land availability and opportunity to add housing under supply constrained circumstances… for these reasons and more including a stable economic and political climate here, our markets thrived and were anticipated to continue doing so. What happened?

These fundamentals did not change once the pandemic hit and evolved, but people did. Wants and needs shifted as the “work-from-home” culture was adopted by employers and employees alike, the inaccessibility to travel abroad made cottage property desirable, who didn’t want a pool to enjoy in their home when there was no where else to go? It was a lot to do in the growth dynamics and movement of people that attracted me to take a deep dive - every trend I learned while completing my masters degree was that cities around the world were seeing a boom in density. Shared resources, smaller living spaces, and the desire to be in a city-like eco-system. When the luxuries and amenities that accompany city living were no longer existent, people moved. With a demand shift shared by so many, and access to cheap money - the buying spirit was instilled in many. The way we lived changed, and what we wanted/needed in a home was transformed.

But what is happening now? That’s what we all want right? Predictions, outlook, answers? Unfortunately myself and my team here at TYLER MCLAY Realty Group do not possess a crystal ball - if we did id retire via consecutive lotto max wins… that said, there are no indicators to read, signals and signs we can interpret or history to examine that may point us in the right direction for next weeks winning lottery number. The same is not true for real estate. There is a lot that exists to make educated and concrete predictions based on statistical fact, past experiences and market movers. When we dive even deeper, those predictions and expectations become firm beliefs. What can we examine today, looking forward?

1. Insatiable Demand; Toronto is consistently ranked among the best cities in the world to live, and for very good reason. The demand stems from our stability in economic and political climates, our diverse culture, and quality of life offered here; with our immigration targets ambitiously set to bring 1.5 million newcomers to Canada over the next 3 years - the majority of which want to plant roots in Toronto for the job opportunities and multicultural environment. Immigration contributes to the economy positively; creating jobs, encouraging trade, supporting the aging population and meeting temporary and full-time labour market needs  -  not  to  mention  international  students  and  the  craving  to  study  at  work-class Canadian institutions. Students need housing too. I'm taking the demand conversation a little deeper here and could easily break down immigration, foreign students and reasoning for choosing Toronto and/or Canada among the many nations throughout the globe - but painting a picture on who and why is creating such incredible demand displays the resiliency and attraction in our real estate market. Employers from around the world, including some of the biggest names in tech are taking notice - Amazon, Meta, TikTok and Google have big plans for flagship operations in Toronto. The quality of our workforce, combined with the relative affordability of that workforce makes Toronto an easy choice. Demand for housing in our market is just beginning - extrapolate to examine other world- class cities such as London, Singapore, New York and LA. These markets are simply not markets that the population owns real estate in. They rent. And the extent at which our growth is exponentially trending upward, the opportunity for ownership period is evaporating. This is not a bad thing, just a natural progression. We have a number of rental options; previously only serviced by the individual landlord which we are finally now seeing some  purpose-built  assets  for  renters.  What  I  am  alluding  to  is  that  the  window  of opportunity is shrinking - especially for the valuable assets.

2. Constrained Supply; “Buy land, they’re not making any more of it” is a fun quote but very true and self-explanatory. There are two BIG point to examine on the supply side.  One being land itself, limited in the GTA specifically by the lake and Greenbelt as well as being in the vicinity of liveliness. The valuable land, desirable land, is getting more and more expensive - sure we can find some further and further from the core, but that’s just it; further from the core. The vicinity to Toronto and “cores” in general whether it be Oshawa, Hamilton, Barrie our Vaughan outside of Toronto is attractive once again in this post-covid era. The convenience and amenities that accompany city life are back in full force. Employees are back to the office; the Leafs are back and a beer after work sounds great. Overall, the actual land remaining is expensive and the degree of difficulty in building on it intensifies leaving just a handful of skilled and experienced developers able to deliver. The second major and currently, more relevant point on the supply side is the difficulty in actually building this inventory; including the costs and volatility exposed to labour, materials, interest rates and of course land. Development charges have increased 50% last year - forcing developers, already assuming a great degree of risk, to accept smaller margins. The incentives are simply dissolving. That said, the difficulty in adding supply makes the existing supply that much more valuable. Not to mention this is not the manufacture of pen, jeans or winter tires - we cannot turn the knob and have the conveyor belt move faster doubling production. There are lengthy and complex procedures and guidelines to follow making adding supply, event without current factors, challenging and rigid. Bringing new units to market, on average, takes 7 years. 7 years from the moment a developer purchases land to the moment a homeowner is opening up their new door. This number is slightly less in suburbia yet still not a quick process. The resiliency of our pricing and property values are no surprise when we have crippling demand coupled with a very slow and mundane process to add supply.

3. Interest Rates; Up up and away? Of course our only tool left to fight inflation is to increase interest rates in an attempt to reduce access to capital and spending; possibly, by definition only, leading into a recession. That does not scare me in the slightest. A minor blip, a reset. The underlying fundamentals are strong and this is simply in response to a health pandemic - NOT a financial crisis. Canadians enjoyed the benefits of recession without recession throughout 2021 - low interest rates while still earning incomes working from home,  especially home owners vs the renters in hospitality/service positions to generalize. We emerged with more savings than ever. That said; recent inflation numbers, even with the Russia-Ukraine war keeping inflation high with the gas/oil contribution in the mix - have been well below expectations, sparking a rally in the stock  market and establishing confidence in markets as a whole. Inflation is somewhat of a lagging indicator meaning it takes time of the effects of rising rates to be reflected in those numbers. My personal prediction based on reading deep in to the indicators and what they represent? Rates will level off early into 2023 as we continue to see the rate hikes doing exactly as intended - the rapid increases we previously experienced will then need to be corrected and levelled off to remain on target to 2% inflation. I predict rates will begin to come down mid-2023 in early summer months followed by even more consumer confidence - ultimately teeing our market up for a phenomenal 2024 run, inline with fundamentals and regular growth patterns.

What should you do? The window of opportunity is surely closing as we approach confidence in markets. Will we dip slightly more before we see appreciation? Maybe - but to try and time the bottom is an impossibility. Asset prices have come down in response to increased borrowing costs - as we see inflation fall, so will rates, in essence pushing asset prices higher once more. The effects of covid were certainly a black swan event - that level of growth is simply unsustainable, but when examining the fundamentals that make our market attractive and resilient - all signs point to growth and appreciation. The strong rental market shows that the desire to be core is thriving. The eco-system and giant that is Toronto is alive and well and we know, that simply by paying attention and looking at trends, facts and history - we can in fact build our very own crystal ball.

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